Professor Anja Kern, Baden-Württemberg Cooperative State University Mosbach, together with consultant with expertise in ESG, Philipp Jung, and Peter Jung, CEO and business consultant, look into how firms and business leaders can lead a pragmatic and global approach to combat climate change.

The Task of Our Generation: How business leaders can lead a global approach to combat climate change. By Prof. Anja Kern, Philipp Jung, and Peter Jung.

A change in consumer behaviour can save the climate

The latest UN climate report was called a “code red for humanity” (UN, 2021). Indeed, the recent flooding of regions in Belgium and Germany dramatically underline that we are in a race against time. The Paris agreement has been a milestone. But our efforts towards a carbon-free world are not sufficient. State-led investment programmes and incentives to channel funds into green investment can accelerate the transformation towards a carbon-free world but on their own are not effective, at least not fast enough. In the same vein, Green Finance on its own cannot stop climate change. There is even a risk that such regulation results in a green-washing machine entailing heavy bureaucracy without reducing GHG-emissions at a global scale.

To reduce GHG emissions substantially, we must come up with a bolder solution. Global consumer behaviour needs to change. It is time that not only governments, but firms contribute to a global solution by developing a firm-led pragmatic approach focusing on changing consumer behaviour.

In the following article we elaborate six non-exclusive criteria to judge the effectiveness of any approach to reduce GHG-emissions and the role of firms and business-leaders in this.

1. Only a global approach can solve the climate change problem

Looking at the global share of GHG-emissions, China causes about 27%, followed by the USA with 11%, India accounting for 6.6% and the EU for 6.4% (RHG, 2019). Reducing GHG-emissions at regional, national, or supranational levels is not going to save the planet. Indeed, as some jurisdictions regulate in favour of green industries, brown industries may relocate to other parts of the world. As the EU-government plans to pull out of coal, the G-20 countries increase their overall coal-fired generating capacities by a quarter of the current global capacity (BloombergNEF, 2021). In Africa there are more than 950 coal power plants under construction or planned for construction (Handelsblatt, 2019).

If the recent Shell judgement was celebrated as victory for climate change advocates, it is not certain that it is a victory in the battle against climate change. In a global context, firms based in jurisdictions without climate regulation can continue to invest and exploit brown industries. As such, only a global solution can solve the climate change problem.

2. A firm-driven approach increases the prospects of global adoption

Governments face global challenges but can only act effectively within their jurisdiction. In contrast, international corporations are actors on the global scene. Globalization has led firms to develop regulations such as IFRS facilitating global transactions and enhancing transparency. It logically follows that corporate managers should have a longstanding experience in initiating global regulation and developing and implementing it across countries and organizations, far more than governments have.

In recent years, business leadership has evolved towards an understanding of firms as corporate citizens having responsibility towards future generations. Both the planet and society need those leaders to bundle their power, experience, and competence to develop a global solution to climate change.

A firm-driven approach has the advantage of considering the realities of global value chains, not being linked to national interests and being less subject to ideological debates. As such, an approach that unites a critical mass of firms, such as leading consumer brands, industrial firms, retailers, and software suppliers has a greater chance of getting adopted on a global level than solely government led initiatives.

3. Climate focus can enhance swift global acceptance and implementation

The tipping point of no return in the climate system is close. However, global emissions are still rising. Being far from a consensus on how to decrease global GHG-emissions, it is crucial at this stage to focus all efforts on this pressing problem.

Whilst other environmental and social issues such as, for example, the protection of biodiversity and human rights are also important, mixing those issues with the central problem of climate change will make it even more difficult to establish an alliance between different cultures around the globe. Separate solutions should be found for these other environmental and social issues. Consequently, firms, together with societies and governments, should work for a pragmatic solution focusing on reducing GHG-emissions.

4. The approach should be effective in changing the behaviour of end-consumers

For leading experts such as the economist Partha Dasgupta (2021), the pricing of environmental costs such as climate change is the only way to transform our economies. According to Dasgupta, the key problem is that we failed to set a price on the capital of nature. The true value of various goods and services is not reflected in market prices, because we can access these resources at little or no monetary charge. These price distortions have led human beings to invest relatively more in produced capital and underinvest in natural assets. Dasgupta calls for the global financial system to take into account the price of natural capital, which is the condition for humanity and nature being able to live in a balance.

One solution to pricing natural capital is a carbon tax or GHG-fee. The design of a carbon tax involves decisions about the tax rate, the point of taxation in the supply chain and the border adjustment to address international trade. We propose that products and services are charged with a GHG-fee for the end-consumer only (Kern, Jung, Jung, 2021). Such a fee can be implemented by global firms having an immediate impact on end-consumers. A standard fee could be fixed per product-group. Retailers could collect the fee and pass it on to the state. And consequently, states can use the funds for the transformation of the economy, e.g., to invest in research and development of carbon-free technologies. Further states can use the funds for compensation of low-income populations.

However, firms would need time to adjust to the GHG-fee. They should also be given the option of adding less than the standard fee, if they can prove that their products emit fewer climate-damaging emissions along the value chain than the standard. No carbon border adjustment is needed in case of a global approach. To alleviate a sudden sharp price increase we propose a step-by step approach based, for example, on a product/GHG-materiality map. The products and services, with the highest GHG-emission rates, could be targeted first by a price-increase. Such a consumer-focused approach could lead to transforming global consumption patterns towards a green economy.

Whilst this model has considerably more points of taxation than when taxing, for example, only the energy providers, it has the advantage that there is a direct impact on consumers, thus changing consumption patterns. If the point of taxation is early in the value chain, e.g., at the energy provider, national or regional governments could compensate the price increase via subsidies or tax relief for certain sectors, which could prevent a change of consumption patterns. Also, this solution engages firms around the globe to work out a pragmatic approach and commit to it before proposing it to governments.

Whether this or another approach, the point is that corporate leaders having knowledge of global markets and consumer behaviour could contribute to develop a solution that targets a shift of consumption patterns. A market and price driven approach could be more effective than current approaches based on regulatory partitioning with bans for various services and products, risking entailing heavy bureaucracy.

5. The approach should be leveraging current purchasing power to transform the global economy

We believe that the most industrialized economies with highest purchasing power can finance the transformation of the global economy by changing consumption patterns and lowering consumption levels. A reduction of consumption for a transition period is a way to considerably reduce GHG-emissions. Such a renouncement of consumption is the task of our generation. Later generations will be able to again enjoy similar levels of consumption within a circular economy and relying on carbon-free technologies.

As the global economic order shifts, time is running out. If economies with higher purchasing power want to transform the global economy, they need to do so while they are still in the position of relative power – because after the shift it will be difficult to ask the now emerging countries to renounce consumption when it is their turn to enjoy prosperity. It is even more difficult as the wealth of today’s industrialized economies is partly built on the exploitation of resources in other parts of the world without paying the true price including external costs.

In this context, it is important to conceive the allocation of funds to low-income populations. The latter are particularly vulnerable to suffering from economic hardship, when prices rise to such high levels that well-being related to housing, nutrition, and health is affected.

Yet, governments have so far not addressed the urgency to reduce consumption and change consumption patterns. The risk is that current efforts focus more on looking green rather than becoming green. Indeed, people are made to believe that it is possible to become carbon-neutral without having to renounce something. For example, carbon offset markets may create the idea that becoming net-neutral is like a papal indulgence: GHG-emissions can be compensated by buying shares of green projects bearing the risk of focusing on becoming green on paper without significantly reducing GHG-emissions.

Governments facing election cycles may also be afraid to tell the inevitable facts. As such, business-leaders accountable to shareholders and other stakeholders are more inclined to address the facts and take decisions accordingly for the survival of their firm and the planet, especially when having a long-term perspective.

6. A shared vision and a coherent strategy to save the planet

There are multiple projects underway to combat climate change resembling a patchwork of initiatives and actions without coordination. In the field of Green Finance, we find competing sustainability accounting standards, i.e., the EU develops a taxonomy and a non-financial reporting regulation, while the IFRS Foundation is planning a climate amendment, and we find other initiatives such as projects to create carbon offset markets, central banks developing approaches to handle climate risk and the EU carbon border tax. However, coordination between institutions and jurisdictions seems limited.

As a result, this situation could lead to regulatory chaos with GHG-emissions further rising. Before designing, passing, and implementing regulations across various jurisdictions therefore, we first need to think about where we want to go and how to get there. We need to develop a shared vision and coherent strategy. Regulation can then be derived from such a strategy. For us, corporate business-leaders could have core competences for developing such a shared vision and a strategy and implementing it globally.

A strategic approach could draw on the idea of the 2018 Nobel prize winner William Nordhaus (2019) to create an institution responsible for developing a vision and strategy to deal with environmental costs of climate change. Indeed, a global institution could bring together a critical mass of multinational firms, civil society organizations, governments, and scientists. Moreover, it could develop a vision and strategy for the transition towards a green carbon-free economy, including establishing a framework for a global carbon tax and guidelines for the allocation of funds to low-income populations risking being exposed to economic hardship.

The task of our generation

We are calling for a strategic approach to save the planet. We contend that firms, civil society organisations, governments and scientists could create a global institute to develop a climate strategy. The strategy should focus on changing consumer-behaviour. Regulation should be derived from such a strategy.

Time is running out – as we approach the tipping point of no return and as the global economic balance of power shifts. Leveraging our economic power requires renouncement to consumption. This renouncement is the task of our generation.

References

• BloombergBNF (2021). Climate Policy Factbook, https://about.bnef.com/blog/new-report-finds-g-20-member-countries-support-fossil-fuels-at-levels-untenable-to-achieve-paris-agreement-goals/
• Dasgupta, P. (2021). The Economics of Biodiversity: The Dasgupta Review.
• Handelsblatt (2019), UN: Gerd Müller warnt vor Welle neuer Kohlekraftwerke in Afrika, Handelsblatt Online, https://www.handelsblatt.com/politik/international/un-vollversammlung-gerd-mueller-warnt-vor-welle-neuer-kohlekraftwerke-in-afrika/25044066.html?ticket=ST-10101162-HSci5HvFdzChKOlXzyYp-ap1
• Kern, A., Jung, P., & Jung, P. (2021). Mit Nachhaltigkeit gegen den Klimawandel. Controlling & Management Review, 65(3), 24-31.
• Nordhaus, W. (2019). Climate change: the ultimate challenge for economics. American Economic Review, 109(6), 1991-2014.
• RHG (2019), https://rhg.com/research/chinas-emissions-surpass-developed-countries/
• UN, (2021). IPCC report: ‘Code red’ for human driven global heating, warns UN chief, https://news.un.org/en/story/2021/08/1097362

Anja Kern is a former EU Marie Curie Fellow at LSE, ESSEC Alumna, and now has a Foundation Professorship by the Dieter-Schwarz Foundation and the Stifterverband at the Baden-Württemberg Cooperative State University Mosbach (https://www.dhbw.de/english/home), Research and teaching in CSR-Accounting

Philipp Jung is a Consultant in Asset Management & Alternative Investments, with expertise in ESG, Luxembourg.

Peter Jung is an entrepreneur with International Management experience in FMCG firms (Henkel, Danone, Chiquitta) and retail (Tengelmann, Siemens Dental), Board Memberships, Business Consultant and Investor.

Useful links:

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• Discover Baden-Württemberg Cooperative State University Mosbach
• Read a related article Climate Change: Will the post-pandemic world tackle it?

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